‘Technical’ contravention subject to minimum compoundable amount, format for public disclosure of compounding orders revised.
– CS Burhanuddin Dohadwala | firstname.lastname@example.org
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. It provides comfort to any person who contravenes any provisions of FEMA, 1999 [except section 3(a) of the Act] by minimizing transaction costs. Reserve Bank of India (‘RBI’) is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 (‘the Act’) except the contravention under section 3(a) of the Act in the manner provided under Foreign Exchange (Compounding Proceedings) Rules, 2000. Provisions relating to compounding is updated in the RBI Master Direction-Compounding of Contraventions under FEMA, 1999.
Following are few advantages of compounding of offences:
- Short cut method to avoid litigation;
- No further proceeding will be initiated;
- Minimize litigation and reduces the burden of judiciary;
Pursuant to the supersession of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘TISPRO”)and issuance of FEM (Non-Debt Instrument) Rules, 2019 [‘NDI Rules] and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 [‘MPR Regulations’], RBI has updated the reference of the erstwhile regulations in line with the NDI Rules and MPR Regulations vide RBI Circular No.06 dated November 17, 2020 (‘Nov 2020 Circular’).
Additionally, the Nov 2020 Circular does away with the classification of a contravention as ‘technical’, as discussed later in the article.
Lastly, the Nov 2020 Circular modifies the format in which the compounding orders will be published on RBI’s website.
Compounding of contraventions relating to foreign investment
The power to compound contraventions under TISPRO delegated to the Regional Offices/ Sub Offices of the RBI has been aligned with corresponding provisions under NDI Rules and MPR Regulation as under:
|Compounding of contraventions under NDI Rules|
|Rule No.||Deals with||Corresponding regulation under TISPRO||Brief Description of Contravention|
|Rule 2(k) read with Rule 5||Permission for making investment by a person resident outside India;||Regulation 5||Issue of ineligible instruments|
|Rule 21||Pricing guidelines;||Paragraph 5 of Schedule I||Violation of pricing guidelines for issue of shares.|
|Paragraph 3 (b) of Schedule I||Sectoral Caps;||Paragraph 2 or 3 of Schedule I||Issue of shares without approval of RBI or Government respectively, wherever required.|
|Rule 4||Restriction on receiving investment;||Regulation 4||Receiving investment in India from non-resident or taking on record transfer of shares by investee company.|
|Rule 9(4)||Transfer by way of gift to PROI by PRII of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank.||Regulation 10(5)||Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.|
|Rule 13(3)||Transfer by way of gift to PROI by NRI or OCI of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank.|
|Compounding of contraventions under MPR Regulations|
|Regulation No.||Deals With||Corresponding regulation under TISPRO||Brief Description of Contravention|
|Regulation 3.1(I)(A)||Inward remittance from abroad through banking channels;||Regulation 13.1(1)||Delay in reporting inward remittance received for issue of shares.|
|Regulation 4(1)||Form Foreign Currency-Gross Provisional Return (FC-GPR);||Regulation 13.1(2)||Delay in filing form FC (GPR) after issue of shares.|
|Regulation 4(2)||Annual Return on Foreign Liabilities and Assets (FLA);||Regulation 13.1(3)||Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).|
|Regulation 4(3)||Form Foreign Currency-Transfer of Shares (FC-TRS);||Regulation 13.1(4)||Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.|
|Regulation 4(6)||Form LLP (I);||Regulations 13.1(7) and 13.1(8)||Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs.|
|Regulation 4(7)||Form LLP (II);|
|Regulation 4(11)||Downstream Investment||Regulation 13.1(11)||Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.|
Technical contraventions to be compounded with minimal compounding amount
As per RBI’s FAQs whenever a contravention is identified by RBI or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide (i) whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice; (ii) whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or (iii) whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.
Nov 2020 Circular provides for regularizing such ‘technical’ contraventions by imposing minimal compounding amount as per the compounding matrix and discontinuing the practice of giving administrative/ cautionary advice.
Public disclosure of compounding order
Compounding order by RBI can be accessed at the RBI website-FEMA tab-compounding orders. In partial modification of earlier instructions issued dated May 26, 2016 it has been decided that in respect of the Compounding Orders passed on or after March 01, 2020 a summary information, instead of the compounding orders, shall be published on the Bank’s website in the following format:
|Sr. No.||Name of the Applicant||Details of contraventions (provisions of the Act/Regulation/Rules compounded)
|Date of compounding order
|Amount imposed for compounding of contraventions||Download order
It seems that the compounding order will not be available for download.
The delegation of power is done for enhanced customer service and operational convenience. Revised format of disclosure of compounding orders will be more reader friendly. Delay in filing of forms under MPR Regulations on FIRMS portal is subject to payment of Late Submission Fees (LSF) as per Regulation 5. The payment of LSF is an additional option for regularising reporting delays without undergoing the compounding procedure.
Abbreviations used above:
- PROI: Person Resident Outside India;
- PRII: Person Resident In India;
- NRI: Non-Resident Indian;
- OCI: Overseas citizen of India;
FIRMS: Foreign Investment Reporting & Management System.
|Our other articles/channel can be accessed below:
1. Compounding of Contraventions under FEMA, 1999- RBI delegates further power to Regional Offices:
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